An update from our investment manager, Viktor Szabó - 18 September 2020
The coronavirus pandemic presented an unprecedented challenge to the Latin American region. While the speed and magnitude of the policy response varied by countries, mobility restrictions have been implemented on national or regional levels in every country, while monetary and fiscal policies have been eased significantly to lessen the economic hit. Lockdown measures and a sharp drop in trade, tourism and capital flows the region led to a deep economic contraction. Countries more exposed to commodities exports and tourism were the hardest hit, while those more oriented towards domestic consumption saw a shallower recession. Activity has bottomed in the second quarter and recovery has been gaining momentum since, as mobility restrictions are being eased and the impact of the large stimuli feeds through. However, several countries in region have not managed to get a grip on the spread of the coronavirus yet, with the number of new daily cases remaining elevated.
Central banks across the region have cut their policy rates and provided liquidity support to their banking sectors. We saw intervention in the foreign exchange markets, while central banks of Chile and Colombia launched quantitative easing programs, supporting the local government bond markets with direct purchases. New loan and refinancing facilities were introduced to help the corporate sector with financing needs. Meanwhile, the Federal Reserve has broadened its swap lines to include Brazil and Mexico, providing additional access to US dollars for these countries.
The fiscal response was also overwhelming, with special focus on protecting the most vulnerable households and companies and safeguarding jobs. Among other measures this includes direct cash handouts, tax deferrals, acceleration of tax refunds, broader unemployment coverage and government loan guarantees. Chile’s stimulus package is equivalent to 7% of GDP, while Peru’s total measures could reach 12% of GDP. Brazil’s primary budget deficit will balloon to 11% of GDP, while Colombia raised its fiscal deficit target to 6.1%. The only notable exception is Mexico, where the administration was relatively slow to react to the pandemic outbreak, and still wants to maintain its original tight fiscal objectives, with only relaxation in healthcare spending allowed so far.
We were positively surprised by the resilience of the region. Despite this unprecedented economic shock and a brief period of capital outflows countries maintained liquidity on their financial markets and the banking sector, while corporate default rates remained very low. The rapid and targeted policy response to the huge challenges presented by the pandemic also speaks about the maturity of the core emerging markets in Latin America.
Despite the short-term uncertainties, we remain optimistic about the Fund’s long-term prospects, given the resilience of the underlying holdings. We will also continue to look for opportunities to select high quality stocks that are backed by solid fundamentals and long-term growth potential that aim to deliver robust yields.